A post for Ana on 529 plans

October 7, 2013 — nicoleandmaggie

We were poking around on medical moms blogs when we came across this comment from reader Ana. She said she wanted to just be told what to do with 529 plans because she’d hit the paradox of choice and everything was all complicated.

The post was almost a month old so we felt silly for replying to it there, so we figured we’d reply to it here and hope that Ana saw it.

Also: a disclaimer. We’re not financial advisers. Take our “advice” such as it is at your own risk.

Step 1: Check to see if you live in one of these states that offer tax breaks for 529 contributions.

1a. If you do, then go with your state’s 529 plan.

1b. If you don’t, then go with Utah. There are some other 529 plans that are now just as good as Utah’s but Utah’s has always been ranked among the top and we hope will continue to be ranked so.

Step 2: Pick a plan company within the plan.

2a. If Vanguard is one of your options, go with that.

2b. If not, then look at the fees. Pick one with low fees.

Step 3: Pick a fund from your choices.

3a. You want to look for terms “age-based”, “life-cycle” or “target-date”.

3b. If there are multiple choices among these options, then it doesn’t really matter which one you pick. They’ll be different in terms of risk and possibly fees. You’ll again want to focus on the lowest fee plan first. If your kids are little, more risk is better, if they’re closer to college, less risk is fine. Don’t worry about the risk if you can’t decide– flip a coin or something. It’s better to pick something randomly than to pick nothing at all because you’re worried about getting the “best”.

So, if you’re in a state that doesn’t give a tax advantage, you want the Utah UESP Vanguard Age-Based Aggressive Global fund. And you’re done. If you’re in another state we’d be happy to poke at their options for you.

Put in what you can. We like putting some away automatically each month. Something is better than nothing.

I just sent for enrollment paperwork for Vermont’s state plan. Our state doesn’t offer a tax incentive, but we plan to move to Vermont in the next few years. I’ve been going back and forth on setting them up for the boys, but when I thought about the piddly interest they were getting with their college savings in a CapOne360 account I decided to go ahead and set up the 529s.

Of course I’m reading! THANK YOU!!! Seriously you just did what hours of searching and asking never could. You simplified the whole thing…my state has a certain amount tax deductible but apparently its for “any state plan” (though when I searched for anything about this on my state government site, nothing came up (maybe there isn’t any credit anymore?). Currently our college savings are sitting in an ING account, accruing minimal interest. We’ve put in lump sums when the boys get money from my parents. When we get back on our feet ourselves, we do plan to put in a little per month. (we’re trying to max out our own retirements first, better to have the kids take college loans than to have them obligated to help us out in our old age, right?)

Go ahead and take that money from the Ing savings account and stick it in the Utah plan. (Though double check on your state’s page to make sure there’s no longer a tax credit or that the credit is for any state plan– that information might be on the FAQ of their own 529 page.) Once you have the Utah plan, if relatives ask you what to get your kids for presents, you can always mention the 529 plan as an option and give them information to deposit money there directly.

OK, so I can’t find the information anywhere, so I submitted a question to the Revenue Bureau to confirm that any state’s plans are deductible. It was clear that only my state plan was exempt from inheritance taxes. So if only my state’s plan has tax benefits, I should go with that, right? Any thoughts on PA plans? (Yes I am shamelessly picking your braaaaiiiinnnnns) because this kind of thing just inevitably leads to paralysis. Anything more than one choice and its not going to happen for months/years).

If only your state’s plan has tax benefits, then you should go with that one. (There’s no cases to my knowledge of states having such crappy plans that it makes a tax deduction a worse option.)

By PA you mean Pennsylvania? http://www.pa529.com/save-gsp-faq.html looks like they do offer state benefits for their plan. (Not sure if they offer them for other states.) They use Vanguard, which is great– they’re lowest cost. Go with their age-based aggressive. It is both the best choice in terms of long-term investing (it starts out mostly in stock indexes, then moves towards bonds in a way to maximize growth, which you can do when you have a long event horizon) and also has the lowest fees (0.48%), making it an easy choice.

The institution where I work has a frighteningly generous tuition benefit for employees’ kids; if I can stay here another 11 years (OK by me) or keel over while employed, DS will qualify (assuming the benefit remains). To be honest I have somewhat mixed feeling — moral hazard and all that — but on the “bright” side its generosity notwithstanding, if he goes to a pricey cool it will also cost us a noticeable enough amount to be, well, noticeable.

My mom’s funded 529s for all her grandkids, which will be some help (we’re talking maybe 10K in there now, not huge sums — but, again, noticeable). Other than that, we’re prioritizing retirement savings over savings for college, and not to where funding both is easily feasible.

we became overwhelmed with choices (and grandparent pressure) when we had a newborn, and just threw up our hands and chose our state 529. It’s OK. There were better possible choices but I’m not looking now.

Grandparent contributions are making up for any shortcomings in our decisionmaking. Child is 8 and he could pay for his first two years at State U if he Doogie Howsered it this year. If all goes well we’ll be able to kick some toward same-age cousins with no college funds (different grandparents) or maybe one of us old people could do another degree just for fun. Or maybe he’ll go somewhere insanely expensive. He’ll have more choices than we did, for sure.

One thing I learned from talking about college funding with the grandparents, though, is that our parents did pay-as-you-go for our tuitions. We both went to our respective State U’s, and it was 15-20 years ago when they were relatively cheaper, and I got a small scholarship, but I’m still astonished. My mom did it for 8 years in a row, since my little brother started my 5th year (i paid for that one). His parents had 2 in college at once. I guess that’s a vote for the “pay off the mortgage before your kids graduate high school” plan. Since we’re pre-saving and (knock on wood) paying off the mortgage when he’s a sophomore, we are going to be RICH compared to our folks during those years.

Yeah, we did pay-as-you-go for my stepkids, and while we were only paying half (their mom picked up the other half) and this was about a decade and a half ago and we have very affordable state institutions (which is where they went), it was — well, noticeable, but, that said, feasible for us at that time, even with a 2-year overlap across the kids). And that was with a mortgage (back when interest was around 7.5%). But worth it, in a wide assortment of ways. This no doubt reflects much about out own environment and backgrounds (though not DH’s background; he put himself through school, first gen.), but it would have seemed very odd and unloving not to pay for the kids to attend at least a state school.

my mom’s a public school teacher, and was single then. She used to make nickels squeak, but I still don’t know how she managed. Partner’s parents are both first-gen college graduates with factory worker parents and immigrant grandparents who didn’t/couldn’t help at all, so they value the hell out of education.